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LIQUIDITY RATIOS - SHORT TERM SOLVENCY

N o Ratio

Formula

Numerator

Denominator

Significance

Quick Ratio or Acid test Ratio

Quick Assets Quick Liabilities

Current Assets Less: Inventories Less Prepaid Expenses

Current Liabilities Less : Bank Overdraft Less Cash Credit

Ability to meet immediate liabilities. Ideal ratio is 1.33:1

A. LIQUIDITY RATIOS .SHORT TERM SOLVE NCY N o Significance Ratio Formula Numerator Denominator 2 3 Cash In Hand (Cash + Marketable +Balance at Bank Absolute securities) +Marketable Cash Ratio Current Liabilities securities & short Term investments Sundry Creditors (For Goods) +Outstanding Expenses +Short Term Loans & Availability of cash to advances meet short term +Bank Overdraft/ Cash commitments Credit +Provision for Taxation +Proposed or Unclaimed Dividend .

A. LIQUIDITY RATIOS .SHORT TERM SOLVENCY N Ratio o Significance Formula Numerator Denominator 4 Interval Measure Annual Cash Expenses Current Assets 365 Quick Assets Ability to meet regular Less: Inventories Cash expenses=Total Cash Expenses per Day cash expenses Less Prepaid Expenses expenses Less Depreciation and write offs .

e. extend of own funds used in operations 2 Debt Equity Ratio Debt Equity Long term borrowed funds. i. Long term loans from institutions Equity Share Capital + Preference Share Indicates relationship Capital between debt & Equity. CAPITAL STRUCTRE RATIOS-INDICATOR OF FINANCING TECHNIQUES AND LONG TERM SOLVENCY No Ratio Formula Numerator Equity Share Capital +Preference Share Capital +Reserves and Surplus Less Accumulated Losses Denominator Significance 1 Equity to Total Funds Ratios Share Holders Fund Total Funds Total Long term Funds employed in business =Debts+ Equity Indicates long term solvency.B. +Reserves and Surplus Ideal ratio is 2:1 Less Accumulated losses if any Shows Proportion of fixed charge (dividend or interest) bearing capital to equity funds. the extend of advantage or leverage enjoyed by equity share holders Equity Share Capital Preference Share Capital + Reserves and Surplus Fixed Charge Bearing +Debentures Capital Gearing 3 Less Accumulated Losses if Capital + Long Term Loans Ratio Equity share holders Funds any . Debentures. mode of financing.

matching or aggressive. Indicates the Share Holders Fund financing approach + Debt Funds (Numerator followed by the 1+Numerator 2 as in 1 & 20 firm.conservative.Fixed Asset to Long Term 4 Fund Ratio Fixed Assets Long Term Funds Net Fixed Assets ie Gross Block Less Depreciation shows proportion of Fixed Assets financed by by long term funds. idea ratio is less than 1 5 Proprietary Ratios Proprietary Funds Total Assets Equity Share Capital + Preference Share Capital +Reserves & Surplus Less Accumulated Reserves Net Fixed Assets + Total Current Assets (Only tangiable Assets will be included) Shows extend of owners fund utilized in financing assets .

3 Preference Dividend Coverage Ratio Earnings after Tax Preference Dividend EAT Dividend on Preference Share Capital Indicates ability to pay dividend on preference share capital .

Should be generally greater than 1 . COVERAGE RATIOS .ABILITY TO SERVE FIXED LIABILITIES No Ratio Formula Numerator Denominator Significance 1 Debt Service Coverage Ratio Earnings for Debt service (Interest + Installment) Net Profit after Taxation + Taxation + Interest on Debt Funds + Non Cash Operating expense + Non Operating Adjustments Interest on Debt + Installment of Debt (Principal Repaid) Indicates extend of current earnings available for meeting commitments and outflow towards interest and installments.C. Ideal ratio must be between 2 to 3 times 2 Interest Coverage Ratio Sales Less variable cost Earnings before Interest & Less Fixed Cost(excluding Tax Int) Interest or EAT+Tax+ Interest Interest on debt Fund Indicates ability to meet interest obligations of the current year.

TURNOVER / ACTIVITY / PERFORMANCE RATIOS N o Ratio Formula Numerator Denominator Significance 1 Capital Turnover Ratio Sales Capital Employed Sales net of returns Equity share Capital + Preference Share Capital +Reserves & Surplus + Debentures + Long Term Loans Less Accumulated Losses Ability to generate sales per rupee of long term investment. The higher the turnover ratio the better is 2 Fixed Asset Turnover Ratio Turnover Fixed Assets Sales Net of returns Net Fixed Assets Ability to generate sales per rupee of Fixed Asset 3 Working Capital Turnover Ratio Turnover Net Working Capital Sales Net of returns Current Assets Less Current liabilities Ability to generate sales per rupee of Fixed Assets .D.

Finished Goods or Stock 4 Turnover ratio Cost of Goods Sold Average Stock For Manufacturers Opening Stock +Cost fo production less Closing stock For Traders Opening Stock + Purchases Less Closing stock Indicates how fast inventory is used / Sold A higher turnover ratio generally indicates fast Maximum Stock + Minimum moving material while low ratio may mean dead or Stock 2 excessive stock. 6 Debtors Turnover ratio Credit Sales Average Accounts receivable Credit Sales net of returns AR= Debtors+ BR Average AR= Opening Bal+Closing Bal 2 Indicates speed of collection of credit sales 7 Creditors Turnover ratio Credit Purchases Credit Purchases Net of Average Accounts payable returns if any AP= Creditors+ BP Average AP= Opening Bal+Closing Bal 2 Indicates Velocity of debt payment . Opening Stock +Closing Stock 2 WIP Turnover 5 Ratio Factory Cost Average stock o WIP Materials Opening WIP+Closing WIP +wages+Production OH 2 Indicates the WIP movement /Production cycle.

PROFITABILITY RATOS BASED ON SALES N o Ratio Formula Numerator Denominator Significance 1 Gross Profit ratio Gross profit Sales Gross profit As per trading Account sales net of returns Indicator of basic profitability 2 Sales Less Cost of sales or Operating Operating profit Net profit profit Ratio Sales Add Non operating expenses Less Non operating Incomes sales net of returns Indicator of Operating performance of business 3 Net profit Ratio Net profit Sales Net profit sales net of returns Indicator of overall profitability 4 Contribution Sales Ratio Contribution Sales Sales less Variable costs sales net of returns Indicator of profitability in marginal costing .E.

If +reserves & Surplus and dividends ROCE> Interest rate. Overall profitability of the but not fictitious assets Profit After Taxes business for the capital miscellaneous expenditure not Add : Taxation employed.F. use of +Debentures and long term debt funds is justified Loans Less Accumulated Losses Less Non trade Investments 2 Return on Equity Earnings After Tax Net Worth Profit After Taxes Net Fixed Assets Profitability of Equity funds +Net working Capital Less External Liabilites(Long invested in the business Term) . Liability Route Expenses Comparison of ROCE with Equity Share Capital Add: Non Operating rate of interest of debt leads +Presence share capital incomes like rents. PROFITABILITY RATOS OWNERS VIEW POINT N o Significance Ratio Formula Numerator Denominator Return on investment (ROI) 1 or return on capital employed Total Earnings Total capital Employed Asset Route: Net fixed assets (Including intangible assets like patents.interest to financial leverage. indicates the w/off) Add : Interest return on the total capital +Net Working Capital Add: Non Trading employed.

3 Earnings Per Share (PAT-Preference Dividend) Number of Equity Shares Profit After Taxes Less Preference Dividend Number of Equity Return or income per shares Outstanding= share. whether or not Equity Share Capital distributed as dividends Face value per share 4 Dividend Per Share Dividend Number of Equity Shares Number of Equity Profit distributed to shares Outstanding= Amounts of dividend equity share Equity Share Capital distributed per share holders Face value per share Return On Net Profit after Taxes 5 Assets Average Total Assets Net Profit After Taxes 1/2 of Opening and Closing Balance Net Income per rupee of average fixed assets .

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